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TP Minds Asia, 2017 Singapore
Mukesh Butani
Transfer Pricing Litigation Landscape in India
Current Audit Areas
Government Initiatives
Select Case Law Updates
India BEPS Update – Overview
India BEPS Update – Action by Action
Update on Alternative Dispute Resolution Mechanisms
Contents
Page 2
TRANSFER PRICING LITIGATION LANDSCAPE IN
INDIA
Page 4
Key Highlights related to Transfer Pricng (‘TP’) Litigation in India
o India contributes significantly to global TP litigation
o Since the introduction of TP in the year 2002, India has witnessed a steep escalation in disputes and adjustments
o Almost half of the taxpayers selected for TP audit in India subjected to TP adjustment
o FY 2014-15 witnessed TP adjustments to the tune of USD 7.35 billion, in approximately 2,353 cases
o Key issues - Choice of appropriate methodology, selection of comparables, marketing intangibles, location savings, management services, etc.
o An estimated USD 62.55 billion of tax revenue locked up in litigation before Courts and Appellate authorities (budget speech 2014-15)
o Over 1,800 TP jurisprudence cases has been reported in India
Litigation Trend
Year 2009-10 2010-11 2011-12 2012-13 2013-14 2014-15
Quantum of Adjustments (USD billion)
1.70 3.76 6.96 10.94 9.32 7.35
No of TP audits completed 1,830 2,368 2,638 3,171 3,617 4,290
No of adjudicated cases 813 1,207 1,343 1,686 1,920 2,353
CURRENT AUDIT AREAS
Page 6
Trademarks and trade names that aid in the commercial exploitation of a product or service, distribution channels, customer lists etc.
Indian Revenue has been identifying excessive Advertisement, Marketing and Promotion (‘AMP’) expenses, applying a markup on such excess expenses to allege that the taxpayer was providing a service to the foreign brand owner
Incurring of excess AMP expenses towards brand that is legally owned by the Foreign Associated Enterprise (‘AE’) constituted an ‘international transaction’
Question of law - Whether AMP is an international transaction or not, is currently pending before Apex Court
Before High Court, the question of law has been answered in affirmative (distributors and manufacturers distinguished)
ABC India
Excessive AMP
expenses
ABC Singapore
Owner of brand ‘ABC’
Brand Creation/ Marketing Intangible
In India
Outside India
Marketing Intangible – Concept & Issue
Page 7
Before Income Tax Appellate Tribunal (‘ITAT’ or ‘Tribunal’)
AMP – not an International Transaction Remanded to lower authorities AMP - International Transaction
• Delhi Bench Goodyear India Ltd (M) Honda Siel Power Product Ltd (M/D) Bausch and Lomb Eyecare (India) Pvt Ltd (M/D)
• Delhi Bench Bacardi India Pvt Ltd (M/D) Bose Corporation India Pvt Ltd (D) Nikon India Pvt Ltd (D) Louis Vuitton India Retail Pvt Ltd
(Retailer) Le Passage To India Tour & Travels Pvt
Ltd (Service Provider) Liugong India Pvt Ltd (D) Rayban Sun Optics India Ltd (M/D) Haier Appliances India Pvt Ltd (D) Swarovski India Pvt Ltd (Trader) Daikin Airconditioning India Pvt Ltd (D) Casio India Co. Pvt Ltd (D) Reebok India Company (D) Luxoticca India Eyewear Pvt Ltd (D)
• Chennai Bench TVS Motor Company Ltd (M)
• Chandigarh Bench Widex India Pvt Ltd (D)
• Bangalore Bench Nike India Pvt Ltd (D)
• Mumbai Bench Thomas Cook (India) Ltd (Service provider) L’Oréal India Pvt Ltd (M/D) Heinz India Pvt Ltd (M) Diageo India Pvt Ltd (M) Mondelez India Foods Pvt Ltd (M)
• Chennai Bench Hyundai Motor India Ltd (M) Nippon Paint India Pvt Ltd (M/D)
• Mumbai Bench Molson Coors Cobra India Pvt Ltd (M/D)
M=Manufacturer, D = Distributer
Marketing Intangible – Judicial Trends
Page 8
Before Delhi High Court (‘HC’)
Adjudicating legal question Remanded to lower authorities
Remanded to ITAT post Maruti Suzuki (HC)
Upholding remand to lower authorities by ITAT
• Sony Ericson Mobile Communications India Pvt Ltd (D)
• Maruti Suzuki India Ltd (M) • Baush & Lomb Eyecare India Pvt Ltd
(M/D) • Whirlpool of India Ltd (M/D) • Honda Siel Power Product Ltd (M/D) • Goodyear India Ltd (Revenue’s
appeal dismissed) (M)
• Yum Restaurants India Pvt Ltd (M/ Restaurant Service provider)
• Daikin Airconditioning India Pvt Ltd (D)
• Sony Ericson Mobile Communications India Pvt Ltd (Subsequent year) (D)
• Pepsico India Holding Pvt Ltd (M)
• Le Passage to India Tour & Travels Pvt Ltd (Service provider)
• Casio India Co. Pvt Ltd (D)
• Haier Appliances India Ltd • Toshiba (Revenue’s appeal
against the remand dismissed) (D)
• Rayban Sun Optics India Ltd (M/D)
• Bose Corporation India Pvt Ltd (D)
• Toshiba India Pvt Ltd (D)
Marketing Intangible – Judicial Trends
M=Manufacturer, D = Distributer
Page 9
Before Supreme Court (‘SC’)
Special Leave Petitions (‘SLPs’) of Revenue and taxpayers admitted
Appeals have been tagged in two batches (a) Canon (distributors) and (b) Maruti Suzuki (manufacturers)
Cases in Canon Cases in Maruti Suzuki
• Canon India Private Limited (Lead case) (D)
• Daikin Airconditioning India Private Limited (D)
• Sony Ericsson Mobile Communications India Pvt Ltd (D)
• Casio India Co. Pvt Ltd (D)
• Sharp Business Systems (India) Pvt Ltd (D)
• Reebok India Co. Ltd (D)
• Stryker India Pvt Ltd (D)
• Discovery Communication India (Distributor of rights)
• Amadeus India Pvt Ltd (service provider)
• Haier Appliances India Pvt Ltd (D)
• Bausch and Lomb Eyecare India Pvt Ltd (M/D)
• Avery Dennision India (M/D)
• Toshiba India Pvt Ltd (D)
• Maruti Suzuki (Lead case) (M)
• Honda Siel Power Product Ltd (M/D)
Marketing Intangible – Judicial Trends
Page 10
Intra-group services provided to group entities are under Revenue’s radar
Most common and litigated form of intra-group services are management support services / cross charges
Illustrative list of management support services are :
o Finance, Accounting & Legal o Human Resources o Information Technology o Internal Audit o Tax Planning and Management o Market Risk Management
Revenue challenges determination of arm’s length price for such services and in most cases computes the price as ‘Nil’
Revenue challenges the need and actual receipt of services, commensurate benefits derived by the Indian entity from such services, basis of cost allocation and arm’s length mark-up
Management Charges
Page 11
Robust / exhaustive documentation demanded as evidence :
o Need Test; o Benefit Test; o Rendition Test; o Basis of allocation; o Not duplicative; and o Not a shareholder service
Jurisprudence on legal principles is in favour of taxpayers. Majority remanded back to the lower authorities for examining exhaustive back-up documentation submitted in support of such services
Mindset of Revenue is that management charge are used for profit repatriation
Benefits Payout
Management Charges
Page 12
Transaction Net Margin Method (‘TNMM’) upheld
Commercial expediency not to be looked at by lower authorities
Detailed documentation not required Detailed documentation required
McCann Erickson India Private
Limited
[(Delhi ITAT) ITA No. 5871/Del/2011]
Cushman & Wakefield India Private Limited
[TS-150-HC-2014(DEL)-TP]
TNS India Pvt. Ltd.
[(Hyderabad ITAT) ITA No.
944/Hyd/2007]
Gemplus India Private Limited
[(Bangalore ITAT) ITA
No.352/Bang/2009]
Dresser Rand India Private Limited
[(Mumbai ITAT) ITA No.
8753/Mum/2010]
McCann Erickson India Private Limited
[(Delhi ITAT) ITA No. 5871/Del/2011]
GE Money Financial Services Private
Limited
[ITA No. 5882/Del/2010]
Knorr-Bremse India Private Limited
[(Delhi ITAT) ITA No.
5097/Del/2011]
AWB India Pvt. Ltd.
[(Delhi ITAT) ITA No. 4454/Del/2011]
Dresser Rand India Private Limited
[(Mumbai ITAT) ITA No. 8753/Mum/2010]
AWB India Pvt. Ltd.
[(Delhi ITAT) ITA No. 4454/Del/2011]
Volvo India Private Limited
[384/Bang/2013]
TNS India Pvt. Ltd.
[(Hyderabad ITAT) ITA No.
944/Hyd/2007]
AWB India Pvt. Ltd.
[(Delhi ITAT) ITA No. 4454/Del/2011]
TNS India Pvt. Ltd.
[(Hyderabad ITAT) ITA No. 944/Hyd/2007]
Volvo India Private Limited
[384/Bang/2013]
Management Charges – Judicial Trends
Page 13
Domestic definition of Royalty - use or right to use any Intangible property, such as the right to use industrial know-how, patents, trademarks, trade names, designs or models
Key Aspects
Usefulness/ Uniqueness of the brand/ technical know-how shared?
Valuation of the Intangibles uncertain at the time of entering into a transaction
Identifying what independent enterprises would have done in analogous circumstances
The difference between royalty rate based on the value of the Intangible and actual rate based on the value of Intangible depending on its success
Choosing the most appropriate method to benchmark royalty transaction
Comparable/ third party transaction analysis for the aforesaid transaction, use of suitable databases (royalty stat, etc.)
Intangibles/ Royalty
Page 14
RBI approval is a sufficient benchmark
TNMM upheld Commercial expediency not to be
looked at by lower authorities Comparable Uncontrolled Price Method (‘CUP’) to be applied
Chiron Behring Vaccines Private
Limited
[TS-90-ITAT-2011(Mum)-TP]
Toyota Kirloskar Auto Parts Private
Limited
[TS-415-ITAT-2014(Bang)-TP]
EKL Appliances
[TS-395-ITAT-2011(DEL)-TP]
Syngenta India Limited
[TS-209-ITAT-2013(Mum)-TP]
SGS India Private Limited
[TS-569-HC-2015(BOM)-TP]
Royalty – Judicial Trends
Page 15
Rate benchmarking analysis comprise of two components – Credit rating of the borrower; and identifying comparable lending
arrangements between third parties with comparable terms and credit ratings
Process to determine an arm’s length interest return and challenges:
Credit worthiness of the borrower
Adjusting risk factors for Specific debt characteristics
Determining arm’s length interest rate range
Corroboration by using available market data
Step
s
Availability of comparable data
Adjustment on account of risk profiles
Thin capitalization provisions
Appropriate interest rate (PLR/Deposit rate/ LIBOR/ Base Rate)
Issues
Interest on Loans
Page 16
Contract Research & Development (‘R&D’)- Levels of mark-ups are contended - the tax authorities classifies the services as ‘high value’ services and sought to apply Profit Split Method (‘PSM’) for performing TP adjustment, rather than the traditional approach of applying a mark-up on costs. Circular 6/2013 by Cental Board of Direct Taxes (‘CBDT’) outlines guidelines for identifying a development centre as a Contract R&D service provider with insignificant risks. Guidance principally in line with BEPS guidance. For details, refer Annexure 1
1
Location Savings - Cost savings realized from relocation of processes to low cost jurisdiction. However, the computation of amount pertaining to location due to difference in labour productivity and production volume is unable to account for. It was held in GAP International Sourcing India (P.) Ltd (2012 25 taxmann.com 414) and Watson Pharma (P.) Ltd (2015 54 taxmann.com 88) that no separate / additional allocation is called for on account of location savings, since the benefit is passed onto customer in a competitive market scenario. India chapter updated in UN Manual 2017, directs arm’s length analysis of good local comparables to take into account benefit of location saving (Similar view upheld in the case of Syngenta India Private Limited [TS-988-ITAT-2016(Mum)-TP]). However, absence of such comparable or selection of foreign AE as tested party could still leave the issue open ended.
2
Other Litigation Issues
Page 17
Corporate Guarantees - Debate as to whether corporate guarantee is an international transaction or not is still ongoing with court rulings favoring both revenue and taxpayer. Corporate guarantee fee paid is also commonly challenged by lower authorities 4
Other Litigation Issues
Selection of tested party - Selection of foreign AE as the tested party has been a contentious issue, with judgements both in favour and against the contention. Revenue’s approach is in disagreement with UN Model and OECD leading to widespread litigation Favorable Outcomes - General Motors India Private Limited (TS-215-ITAT-2013(Ahd)), IDS Infotech Limited (TS-184-ITAT-2017(CHANDI), Ranbaxy Laboratories (TS-173-ITAT-2016(DEL)-TP) Unfavorable Outcomes - GE Money Financial Services Pvt. Ltd. (TS-457-ITAT-2016(DEL), Onward Technologies Limited [TS-94-ITAT-2013(Mum)-TP] and Aurionpro Solutions Ltd [TS-75-ITAT-2013(Mum)-TP]
3
Page 18
Penalty Provisions
New penalty clause introduced in relation to TP adjustment, effective FY 2016-17 onwards-
New Section 271AA, imposing penalty of 2 percent of value of each transaction also introduced, in case of: - Failure to keep and maintain information and documents a required by Section 92D(1) and (2) - Failure to report such transactions; or - Maintains or furnishes an incorrect information or document
Existing Provisions New Provisions
100-300 percent of tax on TP adjustment, in absence of good faith and due diligence
No penalty where TP documentation is maintained, transactions declared and material facts disclosed
Penalty of 50 percent of tax on TP adjustment where TP documentation not maintained
Penalty of 200 percent of tax on TP adjustment where transactions not declared or material facts not disclosed
GOVERNMENT INITIATIVES
Page 20
Audit Related
Measures
Taxpayer contentions have been heard at higher forum on critical issues such as share valuation, sogo shosha companies (Japan trading house), marketing intangibles, etc.
Internal Guidance/ Circulars
Range Rules & Multiple Year
Data
APA Program
Safe Harbour Guidelines
Risk based approach
Favourable rulings on Key
Issues
Issuance of guidance note/ clarificatory circulars on critical TP Issues (e.g. AMP, Contract R&D, etc.)
Safe harbour rates were levelled down recently to gain wider acceptance, Introducing receipt of Low value adding Intra Group Services (‘LVIGS’) under safe harbour in consensus with BEPS guidance
Introduction of risk based approach for selection of TP cases instead of compulsory audit based on criteria of threshold limit (for international transactions) of INR 150 million and above
APA program for 9 years of certainty for over 150 taxpayers across industries facing litigation on myriad issues
With a view to end prolonged litigation and in line with international guidance, range rules and multiple year data concept were introduced in the legislation
Government Initiatives
SELECT CASE LAW UPDATES
Page 22
Sun Pharmaceuticals Industries Limited
Sun Pharmaceuticals Industries Limited (‘SPIL’) - Contract
Manufacturer entity
Sun Pharma Advance Research Company Limited (‘SPARC’)
Sun Pharma Global BVI (‘SPG BVI’) – Owner of IPR & Technical Know
how
Caraco Limited (Caraco)
Dem
erge
d
Div
isio
n I
India United States
100%
70%
De
mer
ged
D
ivis
ion
II
Sale of Pantoprazole - 21.57% margin
Sale of Pantoprazole – >95% margin
Transfer of patent related to Pantoprazole
tablet
Transfer of R&D relating to
Pantoprazole pursuant to demerger
Transaction Flow
Ownership Structure
Agreement for the sale was entered by SPIL; SPIL being the ultimate parent entity entered
into all arrangements with its AEs on behalf of the Group
Facts of the case
ITAT Ruling – Sun Pharmaceuticals
Page 23
Revenue’s Contention
Bone of contention was that margin earned by SPG BVI on further sale to Caraco (over 95%) was disproportionately higher than margin earned by SPIL on sale to SPG BVI
SPIL is not solely a contract manufacturer but performed substantial functions and assumed equal risks
Apply PSM on the basis that SPIL and SPG BVI are engaged in undertaking complex integrated activities involving use of intangibles
Adjustment of USD 59.82 million by attributing combined profits in equal ratio
ITAT’s Observations
Upheld TNMM over PSM while appreciating the business mechanics of the entire transaction
SPIL was engaged in performing manufacturing function, while SPG BVI was the owner of the IPR rights having biggest risk of litigation and technology obsolescence
Taxpayer was exposed to litigation claim settlement to the extent of USD 550 million (out of which USD 506 was paid by SPG BVI) on account of infringement claim made by a third party supported that the risks were borne by the AE
Apex court ruling in the case of Vodafone International Holdings B.V. which recognized that MNCs constitute subsidiaries in furtherance to their objects in a competitive world
ITAT Ruling – Sun Pharmaceuticals
Page 24
Facts of the case
Indian AE of Instrumentarium Corporation Limited, Finland (‘Instrumentarium Finland’) incurred losses
Revenue contended income escapement to Taxpayer
Revenue alleged that Foreign AE should have charged an arm’s length interest from its Indian AE
Taxpayer pleaded base erosion theory – i.e. overall tax reduction in India. Since resident AE of taxpayer was chargeable to tax at 36.75%, while taxpayer was taxed at treaty rate of 10%
Principles
Does a non-resident Foreign Permanent Establishment (‘PE’) has to comply with the Indian TP provisions (where income is taxable)?
Can an international transaction be justified at arm’s length even in the case that will lead to outflow of funds for Indian AE?
Will the answer to questions will depend upon the income/loss situation of resident AE?
Special Bench of Tribunal – Instrumentarium Corporation
Page 25
Special Bench Ruling
Law provides determining of impact on profit/ loss for the year under consideration, & not for considering the impact on subsequent years
Law is applicable to taxpayer & not the AEs
No provision under Indian TP regulations to provide corresponding deduction/ adjustment
Law provides a bar against lowering income of the non-resident AE, as a result of lowering of deduction in hands of the Indian AE - & not vice-versa
Literal interpretation is unambiguous
No point of base erosion arises as Indian AE was incurring losses – Obiter Dicta
Held against the Appellant – though the quantum of adjustment not deliberated by the Tribunal, while rejecting the contentions of the taxpayer
Special Bench of Tribunal – Instrumentarium Corporation
INDIA BEPS UPDATE - OVERVIEW
Equalisation levy Imposed (@ 6 percent) on consideration for certain digital transactions received by non-resident from India tax resident or from non-resident having PE in India
Patent box Reduced tax rate for qualifying royalties relating to patents developed and registered in India at 10% effective April 1, 2016
Thin capitalisation rules Limit deduction of interest paid or payable to associated enterprise
Unilateral action taken to adopt some of the recommendations of OECD BEPS Action plans:
In line with BEPS Action plan 1
In line with BEPS Action plan 5
In line with BEPS Action plans 4
Page 27
Country-by-Country Report (‘CbCR’) Three-tiered documentation regime comprising of Local File and Master File
In line with BEPS Action plan 13
BEPS Update - India
Multilateral Instruments (‘MLI’) Signed on June 7, 2017 and to implement treaty related BEPS measures in relation to BEPS minimum standards
In line with BEPS Action plans 15
INDIA BEPS UPDATE – ACTION BY ACTION
Page 29
First country to introduce the concept of equalisation levy
Outside the existing Indian tax laws (i.e. not part of Income-tax Act, 1961)
Charge: On consideration by Non Resident (‘NR’) for specified services from:
o Indian resident carrying on business or profession or o PE of a NR
Effective rate – 6 percent (functionality akin to withholding tax)
Scope of specified services – online advertisement, any provision for digital advertising space or any other facility or service for the purpose of online advertisement and any other service as may be notified by Indian Government
Applicability – Only to B2B transactions
Non-applicability:
o NR providing specified services has a PE and such services are effectively connected with that PE or o Aggregate consideration for specified services in a year is upto INR 0.1 million etc
India reserves right – to enhance the scope of specified services via notification
BEPS Action Plan 1 – Equalization Levy
Page 30
Place of Effective Management (‘PoEM’):
India does not have a CFC regime. Finance Act 2015 had enacted the concept of PoEM for the purpose of determining tax residency
On December 23, 2015, a draft guidance seeking to define PoEM that resemble CFC-type rules.
PoEM provisions applicable with effect from 1 April 2016 aim to tighten India’s corporate tax residency status rules, so as to prevent companies from avoiding tax residency status in India by shifting insignificant or isolated control and management roles or functions outside India.
BEPS Action Plan 3 – Controlled Foreign Company (‘CFC’) Rules
Page 31
Applicable from April 1, 2017
Limiting Base Erosion on account of tax deductibility of interest and similar costs
Introduces a ceiling on interest deduction (against business income) provided following conditions are cumulatively fulfilled –
Permissible interest cost deduction –
o Total interest paid / payable in excess of 30 percent of EBITDA (Earnings before Interest, taxes and depreciation and amortization); or
o Interest paid/ payable to AE, whichever is less
Excess interest is disallowed and carried forward for 8 years; such interest is eligible for set off against business income of future (8) years, subject to limit on interest deduction for such year/s
Condition 1
• Borrower is an Indian company or a PE of foreign company
Condition 2
• Borrower incurs interest, or similar consideration, exceeding INR 10 mn
Condition 3
• Interest incurred in respect of debt issued by NR AE, or third party debt guaranteed by AE
BEPS Action Plan 4 – Limiting Base Erosion
Page 32
Concessional taxation regime for patents developed and registered in India
Introduction of section 115BBF in Indian tax laws. Key features:
o Taxability of royalty income @ 10 percent on gross basis
o No deduction of any expense/ allowance while computing the royalty income
o Option given to taxpayers to either choose section 115BBF vis-à-vis normal provisions of Indian tax laws
o Option once exercised is to be followed for next 5 consecutive years (In case of breach, the option under section 115BBF cannot be availed for next five consecutive years)
BEPS Action Plan 5 – Patent Box Regime
Page 33
Actions Plans 8 - 10 of the BEPS Action Plan require development of TP rules which create TP outcomes in line with value creation
Action Plan 8, 9 and 10 deal with development of rules to prevent BEPS by:
o moving intangibles among group members
o transferring risks among, or allocating excessive capital to group members
o engaging in transactions that would not or would very rarely occur between third parties
LVIGS – Specific guidance has been given for IGS that can be characterized as below:
o Services are supportive in nature
o Services do not form part of core business of the Multinational Enterprise (‘MNE’)
o Services do not require the use of or lead to creation of valuable and unique intangibles
o Services do not lead to control or creation of significant risk.
India recently updated its chapter in UN TP Manual which is principally aligned to BEPS Action Plan 8 to 10
Also, safe harbour for receipt of LVIGS was introduced recently with a cap of INR 10 Million on transaction value
BEPS Action Plan 8 to 10 – TP
Page 34
Finance Act, 2016 legislated CbCR standards advocated by OECD as part of BEPS Action Plan 13
o Effective from April 1, 2016 and covering MNE groups having aggregate revenue equal to or more than EUR 750 million (~ INR 5,395 crores approx.) in the last completed year
Every constituent entity needs to notify to the Income tax authority in a prescribed form whether:
o It has been nominated as the alternate reporting entity of the international group; or
o Provide details of the parent entity or the alternate reporting entity along with the country / territory where the entities are resident
If the parent company is an Indian entity, the first CbCR filing becomes due by November 30, 2017 for financial year ending March 31, 2017
65 countries** (including India) has signed Multilateral Competent Authority Agreement (‘MCAA’) on automatic exchange of country-by-country report
MCAA will facilitate time and resource efficient exchange of information between tax administrations, which would aid tax administrations to better assess transfer pricing and other BEPS risks, and consequently identify the key focus areas for audits.
*Detailed rules are yet to be prescribed **As on July 6, 2017
BEPS Action Plan 13 – Country by Country Report
Page 35
Implementation of BEPS necessitates numerous changes, one of which is relating to amendments in the bilateral tax treaties
Action Plan 15, aims to overcome practical difficulties arising in the course of modifying the tax treaties and within a set time frame
MLI is a convention which will be signed by several countries, and would bring necessary changes in the bilateral tax treaties executed by said countries
Signing of the convention by countries involved would amount to expression of consent and will make the MLI binding in nature
Post application of MLI, treaty provisions will have to be read in consonance with the corresponding provisions in MLI along with any reservations expressed by countries
On June 07, 2017, India along with 66 other nations has signed MLI
Consent accorded to BEPS minimum standards on Action Plan 2 (Hybrid Mismatch arrangement), Action Plan 6 (Prevention of treaty abuse), Action Plan 7 (Artificial avoidance of PE status) and Action Plan 14 (Dispute Resolution and MAP)
India has not consented to binding arbitrary provisions as also envisaged under Action 14
Refer Annexure 2 for summary of India’s MLI position
BEPS Action Plan 15 – MLI
UPDATE ON ALTERNATIVE DISPUTE RESOLUTION MECHANISMS
Page 37
Advance Pricing Agreements – Recent Developments
APA transactions concluded
IT enabled services (“ITes”)
Engineering design services
Software development services
Distribution of manufactured goods
Royalty payment
Corporate guarantee
Interest payment
Contract Pharmaceutical Manufacturing
Administrative and business support services
Banking
Automobile
Sogo Shosha trading
APAs filed – 800+
APAs concluded 162* Unilateral
+ 13 Bilateral
APAs*
*Source: Press Release dated September 4, 2017
Services transactions (e.g. IT/ITeS) is one of the most litigated sector in the area of Transfer Pricing and hence majority of the APA applications relate to such transactions
Introduced in 2012, Advance Pricing Agreement (‘APA’) allows MNEs to discuss and agree on inter-company prices / margins in India (and abroad) / methodology, for a cumulative period of 9 years
Page 38
APA – Outcomes and Other Issues
Outcomes
Definition of pricing policy for administrative
implementation
Definition of cost base
Progressive mark up for
services Change in approach
from arithmetic mean to
percentile
Pricing policy – Cost plus v/s
hourly rate
Re characterization – High value v/s low value
Other issues
Level of Interaction/
Dialogues between
government
Secondary adjsutment
Interplay with other Laws such
as GST Policy to be adopted in the interim
period
Approach for open matters
Correlative relief clause
in DTAA
Page 39
Mutual Agreement Procedure
Mutual Agreement Procedure (‘MAP’) Update o India US corridor – More than 100 tax disputes involving tax demand of approx. USD 800 million resolved through MAPs
recently
o Most MAP applications received for transactions with USA, UK, Japan and Canada
o Transactions with other key countries such as Germany, France, Singapore, etc. could not be covered under MAP
Amendments in international tax treaties
o India’s commitment under BEPS to meet the minimum standard of providing MAP access in TP cases to be met through MLI
o Treaties with South Korea and Singapore amended to allow corresponding adjustments in the other tax jurisdiction as a result of a tax on profits in one country, paving the way for Bilateral APA and MAP on TP matters
Contacts
DISCLAIMER: This presentation transmitted to the recipient is confidential and intended solely for the use of the individual or entity to whom they are addressed. If you are not the intended recipient, you are notified that disclosing, copying, distributing or taking any action in reliance on the contents of this information is strictly prohibited under the law and the sender shall not be liable for any losses. Please notify the sender immediately by email if you have received this by mistake, and immediately delete this from your system.
Mukesh Butani +91 981 113 2000 Mukesh.Butani@bmrlegal.in
ANNEXURES
Page 42
Annexure 1
Circular 6 / 2013 [Issued by CBDT] – Clarifications on functional Profile of Contract R&D centres
Foreign AE to perform economically significant functions including conceptualization and design
Funds / capital /assets
Significant functions
Foreign AE to provide for funds / capital and economically significant assets for the R&D
R&D centre does not assume or has no economically significant realized risks. Actual conduct to supersede the contractual term with the foreign AE
The foreign AE control / supervise the R&D function through its strategic decision to perform core function as well as monitor activities
The contract R&D centre has no ownership right (legal/economic) on the outcome of the research
If foreign AE is in a low / no tax jurisdiction, it will be presumed that foreign AE is not controlling risk. However, this might be rebutted by the taxpayer
Points for consideration
Ownership of rights
Tax jurisdiction
Supervision Risks
Page 43
Annexure 2
Particulars Position (Opted In/ Out)
Article 3 (Transparent entities) Out
Article 4 (Dual resident entities) In
Article 5 (Elimination of double taxation) Out
Article 6 (Prevention of treaty abuse – changes to Preamble) In
Article 7 (Prevention of treaty abuse) In (Simplified LOB with PPT)
Article 8 (Dividend transfer transaction) In (except Portugal)
Article 9(1) (Capital gains from alienation of shares or Interest if Entities deriving their value principally from immovable property)
In
Article 12 (Artificial avoidance of PE Status through commissionaire arrangements and similar strategies)
In
Article 13 (Artificial avoidance of PE Status through the specific activity exemption) In
Article 16 (Mutual Agreement Procedure) In
Article 17 (Corresponding relief) In
Following is a summary of opt ins and opt outs adopted by India:
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